Monthly Archives: November 2013
Unprecedented printing of money by central banks over the last several years was expected to result in inflation. But inflation has not occurred and not only is inflation falling, there is the fear of deflation across the developed world economy. In the European Union and in the United States inflation has been suppressed by high unemployment, so there have been no wage demands and prices of goods and services continue to fall. In Australia there is a lower but rising unemployment and a high Australian dollar which have depressed inflationary tendencies here.
The unexpected low inflation is in large part driven… Continue reading
We are witnessing a world asset bubble stimulated by very low interest rates and continued quantitative easing by central banks. The United States economy is critical to world economic growth but despite a surging equities market, its economy is only making weak progress when one considers the huge levels of quantitative easing delivered from its central bank. New house construction, a driver of the economy is weak and disappointing and despite very low interest rates Americans seem reluctant to apply for mortgages even though mortgage rates are at historic lows. One assumes that this is mainly due to the demographic problem of… Continue reading
Graphic images allow a rapid appraisal of a situation. Consider the following charts which provide a succinct overview of the state of the world economy.
The first chart of the S&P500 shows the continuing bull market stimulated by money printing by central banks and very low interest rates. It is typical of many major national indices at this time and this bull trend shows no signs of relenting.
The equity market bubble continues with the unrelenting intent of central banks to continue quantitative easing. But how long can this bull market continue and is there a probability of a market correction soon? Consider the following.
The American equities markets are at an all time high and when one considers the weekly chart of the S&P 500 below, there is little indication that this trend will change. The RSI indicator is in an overbought position which in my view suggests that the trend in the S&P500 will continue. (I don’t subscribe to the generally held view of an overbought/oversold RSI as… Continue reading
This time it really is different. We now have historically low interest rates and central banks are printing money at unprecedented rates. It was assumed when central banks adopted quantitative easing that very high inflation would be inevitable. But while equity markets have certainly climbed to the point of a bubble, consumer prices have not followed and there is now some trepidation that the developed economies are now entering a period of very low inflation with even the threat of deflation.
The trend is particularly noticeable in the European Union where where annual inflation dropped from a low of 1.1% in September to 0.7% in October. This compares to a year ago when the inflation rate was 2.5%. Last week the ECB halved its interest rate to 0.25%. In the United States inflation is well below the Federal Reserve’s 2% target. Taking a… Continue reading
As a result of very low interest rates investors are now chasing yield and equities still offer a better yield than other investment alternatives. There is little doubt that there is still a significant amount of cash sitting in bank accounts and cash management accounts at very low yields and this pressure could well push the market higher. Central banks seem likely to continue to print money and with a slow United States economy there is a continuing need for the Fed to continue to support quantitative easing and this also argues for a continuing strong market.
So this is a market dependent on excessive liquidity provided by central banks and it is not a market based on GDP growth, but is it a bubble? The following diagram is taken from John Mauldin’s recent newsletter and is an excellent illustration of the bull/bear market cycle and helps… Continue reading